Russia’s current annualised rate of inflation has now been confirmed as 2.8% as of 9th October 2017, with price growth zero for the previous five successive weeks.
Inflation in Russia has over the course of 2017 fallen faster and further than anyone expected. As the Russian Central Bank correctly says, price growth is likely to pick up in December (in Russia it invariably does). However it is now all but inconceivable that it will be 4% for the whole year. The Central Bank has itself now lowered its prediction to 3.2%.
For their part the international institutions have still not caught up with the pace of fall of price growth in Russia. The international credit agencies and the IMF continue to predict annualised inflation for the whole year above 4%. That is now all but inconceivable.
What some may find surprising about these latest inflation developments is that the institution which has been leading Russia’s fight against inflation – Russia’s Central Bank – is giving every sign of being far from happy at the runaway success of its own counter-inflation strategy.
The reason for that is that inflation’s continuing rapid fall is increasing pressure on the Central Bank to cut interest rates further and faster than it obviously wants to do.
The result has been a series of strange statements issuing from the Central Bank yesterday and today, which have claimed that the recent fall in inflation is temporary and is due to one off factors (basically the recent strengthening of the rouble and the better than expected harvest) leading and that price growth is likely to pick up in December.
Inflation however always picks up in Russia in December, whilst the recent strength of the rouble must be due in part at least to the Central Bank’s own high interest rate policies.
Real interest rates in Russia are now in fact at unprecedentedly high levels, because inflation in Russia is falling faster than the Central Bank is cutting interest rates. They are now 5.7% as opposed to 5% at the start of the year.
Meanwhile of the predicted collapse of oil prices to $40 a barrel – predicted by year end both by the Russian government and by the Central Bank at the start of this year, and the basis of the Russian government’s budget calculations for the whole year – there is still no sign. Brent crude is currently trading at $56 a barrel, whilst Urals crude is trading at $53 a barrel.
Perhaps the predicted oil collapse to $40 a barrel will still come – the lesson of the last three years is that accurate forecasts of oil price movements are all but impossible – but as of this moment that is starting to look less likely.
That the Central Bank is struggling to defend its interest rate policy in the face of the rapid inflation fall is shown by a curious claim today by Central Bank Nabiullina that inflation below 3% “does not diverge” from the Central Bank’s 4% target. In reality it is a significant overshoot by any measure.
The one point the Central Bank has made over the past two days which is true is that the inflation perceptions/expectations of the Russian population are still much higher than the growth of actual prices in the shops would justify.
This is a notoriously difficult thing to measure, but data which has appeared over the last two days, and which is presumably based on polling, claims to show that Russians expect prices to rise by 9.7% this year as against the Central Bank’s prediction that they will in fact increase by just 3.2%.
High price growth expectations on the part of the population are unsurprising given Russia’s long history of double digit inflation extending all the way back to the USSR’s collapse. It will inevitably take some time before the population’s perception of inflation adjusts to the reality of lower prices, all the more so as in 2015 the population experienced a further temporary spike of double digit inflation, which must still colour its expectations of where prices will be going in future.
In light of this it is perhaps understandable that the Central Bank – fearing possible demand for higher wages from a population anxious to compensate itself for higher prices which are not in fact coming – may be cautious about easing monetary policy too much.
Whether such caution justifies real interest rates of 5.7% is another matter. On any measure real interest rates at this level seem to me far too high given existing economic conditions, even allowing for the possibility that – as I am coming increasingly to suspect – the Central Bank’s real inflation target is 2% not 4%.
At such high levels the primary effect of interest rates is not to increase savings or reduce inflation. It is to lower the rate of economic growth, which could be higher in Russia than the Central Bank is making possible.